General Environmental Analysis

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General Environmental Analysis

  1. 1. Waste Management, Inc. Strategic Case Analysis Submitted for Approval to: Dr. Jifu Wang
  2. 2. LEADING EDGE CONSULTING Houston, TX The Leaders in Waste Management Group 1 Consultants Jason Cummings Correen Harrell Deanna Lewis Jim Upchurch David Woods
  3. 3. Page 3 of 163 Table of Contents 1.0 Executive Summary..........................................................................8 2.0 Background Information on Waste Management ..........................9 2.1. Brief History of Company............................................................................... 9 2.2. Historical Timeline of Important Events...................................................... 11 3.0 External Analysis ............................................................................13 3.1. General Environmental Analysis ................................................................. 13 3.1.1. Political/Legal Factors.............................................................................. 13 3.1.2. Economic Factors .................................................................................... 16 3.1.3. Sociocultural Factors ............................................................................... 20 3.1.4. Demographic Factors............................................................................... 21 3.1.5. Technological Factors.............................................................................. 25 3.1.6. Global Factors ......................................................................................... 28 3.1.7. Summary of the General Environmental Analysis.................................... 29 3.1.8. Driving Forces for the Future ................................................................... 30 3.2. Industry Analysis .......................................................................................... 31 3.2.1. Industry Description ................................................................................. 31 3.2.2. Industry Operations ................................................................................. 33 3.2.3. Industry Life Cycle ................................................................................... 36 3.2.4. Industry Dominant Economic Features .................................................... 37 3.2.5. Market Size.............................................................................................. 38 3.2.6. Market Growth Rate................................................................................. 38 3.2.7. Industry Trends........................................................................................ 39 3.3. Five Forces Analysis .................................................................................... 40 3.3.1. The Threat of Entry.................................................................................. 41 3.3.2. The Power of Buyers ............................................................................... 41 3.3.3. The Power of Suppliers............................................................................ 42 3.3.4. The Threat of Substitutes......................................................................... 43 3.3.5. Competitive Rivalry .................................................................................. 43 3.4. Industry Competitive Analysis..................................................................... 44 3.4.1. Industry Competitors................................................................................ 44 3.4.2. Anticipated Competitors Strategic Moves ................................................ 51 3.4.3. Summary of Competitive Analysis ........................................................... 52 3.4.4. Key Success Factors ............................................................................... 53 3.5. Summary of External Analysis .................................................................... 54 4.0 Internal Analysis .............................................................................55 4.1. Organizational Analysis ............................................................................... 55 4.1.1. Corporate Vision and Mission .................................................................. 55 4.1.2. Leadership ............................................................................................... 56 4.1.3. Culture ..................................................................................................... 57 4.1.4. Structure .................................................................................................. 58 4.1.5. Summary of Organizational Analysis ....................................................... 58 4.2. Analysis of Firm Resources......................................................................... 58 4.2.1. Tangible Resources ................................................................................. 59 Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  4. 4. Page 4 of 163 4.2.2. Intangible Resources ............................................................................... 62 4.2.3. Capabilities .............................................................................................. 65 4.2.4. Core Competencies and Sustainable Advantages................................... 66 4.2.5. Summary of Firm Resources ................................................................... 68 4.3. Analysis of Objectives.................................................................................. 68 4.3.1. Previous Principal Operational Focus ...................................................... 68 4.3.2. Short-Term Objectives ............................................................................. 69 4.3.3. Long-Term and Financial Objectives ....................................................... 69 4.4. Evaluation of Financial Performance (2005, 2004, 2003) ........................... 69 4.4.1. Financial Condition Analysis .................................................................... 70 4.4.2. Profitability ............................................................................................... 70 4.4.3. Management Effectiveness Ratios .......................................................... 72 4.4.4. Debt, Working Capital, and Liquidity Analysis.......................................... 73 4.4.5. Management Efficiency............................................................................ 74 4.4.6. Market Value Analysis ............................................................................. 75 4.4.7. Growth Analysis....................................................................................... 77 4.4.8. Summary of Financial Analysis................................................................ 79 4.5. Strategic Analysis......................................................................................... 80 4.5.1. Corporate-Level Strategy and Internal Strategy....................................... 80 4.5.2. Business-Level Strategy .......................................................................... 81 4.6. Value Chain Analysis.................................................................................... 83 4.6.1. Summary of Strategic Analysis ................................................................ 94 4.7. SWOT Analysis ............................................................................................. 94 4.7.1. Strengths – Internal ................................................................................. 95 4.7.2. Weaknesses – Internal ............................................................................ 98 4.7.3. Opportunities – External .......................................................................... 98 4.7.4. Threats – External ................................................................................. 101 5.0 Strategic Fit Analysis ...................................................................105 5.1. Current Strategy.......................................................................................... 105 5.2. Current and Long-Term Strategic Concerns ............................................ 106 5.3. Identification and Assessment of Activities for Strategic Fit.................. 106 5.4. TOWS Matrix................................................................................................ 109 5.5. Alternatives ................................................................................................. 112 5.6. Alternatives to Recommendations ............................................................ 115 6.0 Recommendations........................................................................116 6.1. Recommendation I...................................................................................... 117 6.1.1. Objectives .............................................................................................. 117 6.1.2. Deliverables ........................................................................................... 121 6.1.3. Milestones.............................................................................................. 122 6.1.4. Risk Assessment ................................................................................... 124 6.1.5. Long-Term Benefits ............................................................................... 125 6.2. Recommendation II..................................................................................... 127 6.2.1. Objectives .............................................................................................. 127 6.2.2. Deliverables ........................................................................................... 131 6.2.3. Milestones.............................................................................................. 135 6.2.4. Risk Assessment ................................................................................... 136 Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  5. 5. Page 5 of 163 6.2.5. Long-Term Benefits ............................................................................... 139 7.0 References ....................................................................................144 8.0 Appendix .......................................................................................149 8.1. Appendix I.................................................................................................... 149 Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  6. 6. Page 6 of 163 List of Figures Figure 3.1-1: Number of Landfills in the United States by Year 15 Figure 3.1-2: Prime Lending Rate During 1955-2006 17 Figure 3.1-3: US Gross Domestic Product Percent Growth From 2002-2005 18 Figure 3.1-4: Change in the Elderly Population and Total Population 23 Figure 3.1-5: Elderly Population (Ages 65+) 24 Figure 3.1-6: Management of Municipal Solid Waste – 2003 26 Figure 3.3-1: Porter’s Five Forces Model 40 Figure 4.4-1: Comparison of Five-Year Cumulative Return of Stock Value 76 Figure 4.4-2: Waste Management, Inc. Cash Being Returned to Shareholders 77 Figure 4.4-3: Waste Management, Inc. 5 Year Revenue Statement 78 Figure 4.4-4: Waste Management, Inc. Cash Being Returned to Shareholders 79 Figure 4.6-1: Waste Management, Inc. Value Chain 85 Figure 6.1-1: New Product Development and Introduction (NPDI) 120 Figure 6.1-2: The Portfolio Management System with its Key Components 121 Figure 6.1-3: Timeline to Implement Project Effectively 122 Figure 6.1-4: The Stage-Gate® Process 123 Figure 6.2-1: Tonnage of Materials Collected 138 Figure 6.2-2: Crude Oil Futures Prices From April 1, 2005 to April 21, 2006 140 Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  7. 7. Page 7 of 163 List of Tables Table 3.1-1: Worldwide Population Figures 22 Table 3.1-2: Municipal Solid Waste, 1960-2003 26 Table 3.2-1: United States Solid Waste Industry Summary 37 Table 3.2-2: United States Solid Waste Industry Growth Rate 39 Table 3.4-1: Current Financial Information for Allied Waste Industries, Inc 47 Table 3.4-2: Current Financial Information for Republic Services, Inc. 50 Table 4.4-1: Waste Management, Inc. Income Statements 71 Table 4.4-2: Waste Management, Inc. and Republic Services Margins 72 Table 4.4-3: Waste Management, Inc. ROA, ROE, and Industry Rank 72 Table 4.4-4: Waste Management, Inc. Industry, and S&P 500 73 Table 4.4-5: Waste Management, Inc. Debt, Working Capital, and Liquidity 73 Table 4.4-6: Waste Management, Inc. Condensed Balance Sheet 74 Table 4.4-7: Waste Management, Inc. Management Efficiency 75 Table 4.4-8: Waste Management, Inc. Market Value Analysis 76 Table 4.4-9: Waste Management, Inc. Revenue and Income Overview 78 Table 4.6-1: Waste Management, Inc. Strengths and Weaknesses 87 Table 4.7-1: Waste Management, Inc. SWOT Analysis 95 Table 6.2-1: Waste Management, Inc. Cost of Initial Start-Up of Program 131 Table 6.2-2: First Five Years – Total Tonnage of Each Item Collected 137 Table 6.2-3: Costs and Revenues for Products Collected by Waste Management, Inc. 141 Table 6.2-4: Proforma Statement for Waste Management, Inc. 142 Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  8. 8. Section 1.0 – Executive Summary Page 8 of 163 1.0 Executive Summary The purpose of this paper is to provide a complete and detailed strategic analysis of Waste Management, Inc. The paper will concentrate on a detailed description of the external and internal factors that affect Waste Management in the present and the future. In the external analysis, a general environment analysis will be conducted to determine the driving forces in the industry. It will continue with an industry and competitor analysis to determine the primary firms competing in the waste disposal industry. The external analysis will conclude by talking about key success factors that Waste Management must capitalize on to be successful. The internal analysis will be broken into seven sections that include an organizational analysis, a look at the firm’s resources, an objective analysis, a detailed financial analysis, strategic analysis, value chain analysis, and a SWOT analysis. A strategic fit analysis will then be conducted to determine the direction Waste Management needs to precede in based on the external and internal analyses. The strategic analysis will conclude by providing two recommendations for ensuring the survival and prosperity of Waste Management, Inc. into the future. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  9. 9. Section 2.0 – Background Information Page 9 of 163 2.0 Background Information on Waste Management Waste Management, Inc. (NYSE:WMI) has risen to be the largest waste disposal company in the nation and in larger terms, the world, with a large margin over its competitors. Through its many subsidiaries, Waste Management serves close to 2 million commercial companies and around 25 million residential consumers in the United States and Canada. The company is divided into five geographic groups, which include Eastern US, Midwestern US, Southern US, Western US, and Canada. They also have two functional groups, recycling and the waste-to energy program called Wheelabrator, which are services to each of the geographic groups. These entities provide waste collection, transfer, recycling, and disposal services to a large portion of North America (Hoovers Financial Website, 2006). The company operates around 1200 sites. Theses sites include 429 collection operations that use 366 transfer stations and 289 landfills. The landfills include six specialized sites that are disposal sites for hazardous waste. Waste Management also recycles and harvests energy from the waste they collect. The companies recycling program utilizes 138 recycling plants. To convert waste to energy, there are 17 waste-to-energy sites and 82 landfill gas projects. In the waste disposal business, Waste Management is the leader with the largest fleet of collection and transfer trucks with a staggering number of over 25,000. The company also has 432 of these trucks running on natural gas (Waste Management, 2005). 2.1. Brief History of Company Waste Management Inc. (WMI) was founded in 1968 when a waste disposal company in Chicago, called Ace Scavenger, decided to merge with a similar company Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  10. 10. Section 2.0 – Background Information Page 10 of 163 in Florida. This was primarily due to the passing of the Solid Waste Disposal Act in 1965 by the US Government. The owners of the two companies saw this as a sign of changes in the industry due to the increasing population and their views on pollution and the environment. The firm went public in 1971 and between the years of 1971 and 1980, the company saw revenue grow at a rate of 48% per year. This phenomenal growth rate was primarily due to the many acquisitions the company was making each year. The company continued to grow and enter into new markets, most significantly, the field of toxic and chemical waste treatment. There were also many joint ventures that WMI entered into with countries around the world. The company started having legal problems in the late 70’s and early 80’s, being accused of environmental crimes by the government and environmental agencies. During the mid 1980’s, the company continued to grow by acquiring more firms in their industry. In the late 1980’s and early 1990’s, WMI began investing in recycling, especially in the waste-to-energy business. The company acquired a controlling interest in the Wheelabrator Technology Company, which was a leader in the waste-to- energy industry. They also were a part of the tremendous boom in recycling and rose to be the largest recycler in the country (Business and Company Resource Center, 2006). There were many problems that plagued Waste Management since the early 1970’s. These problems dealt with criminal violations, antitrust civil cases, environmental civil cases, administrative cases, and SEC violations. One of the largest issues was the accounting scandal with Arthur Anderson and the fraudulent accounting practices that were in place in the late 90’s to early 2000’s. The accounting company and Waste Management executives inflated profits by $1.7 billion to meet projected Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  11. 11. Section 2.0 – Background Information Page 11 of 163 earning targets. This cost the company a great deal of money and damaged its image. Waste Management shareholders lost an estimated $6 billion when the stock price plummeted 33% after news of the scandal. The overall effect was the merger of WMI and USA Waste, a company only a third of the size of WMI. USA Waste took control of the two firms, but retained the Waste Management, Inc. name. Waste Management is still recovering from this loss and the deceit of their top management, many of which have been replaced due to the scandal (SEC, 2006). Waste Management, Inc. continues today to be a leader in the disposal of multiple types of waste, ranging from solid and medical waste to highly toxic chemical waste. There have been many changes in the past 5 years and a large re-organization of the firm after the SEC charges were concluded. The company continues to grow and its stock price continues to rise at healthy rates. With the cleansing of the Waste Management brand name, accurate accounting practices, and new programs that have been initiated, the company should continue far into the future. 2.2. Historical Timeline of Important Events The following figure shows a brief timeline of the major events that have occurred in Waste Management’s history. It highlights not only the successes the company has enjoyed, but also the many of the frauds and litigations that have occurred during the company’s colorful history. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  12. 12. 1965 – Congress Passes Solid Waste Disposal Act 1965 1968 - Waste Management Inc. Created 1971 – WMI Goes Public 1970 Mid 1970’s – WMI grows by conducting over 200 Mergers and Acquisitions per Year Mid 1970’s – WMI Enters Chemical & Toxic Waste Disposal Leading Edge Consulting Group The Waste Management Experts 1976 – Congress Passes Industry Resource Conservation and 1975 – WMI Begins Recovery Act 1975 International Joint Ventures 1979 – First Lawsuits Brought by EPA for Illegal Practices 1980 – Acquired 20% Stock In Wheelabrator 1980 1985 1990 – Acquired Controlling Interest In Wheelabrator 1990 1991 – WMI Largest Collector of Recyclable Materials 1991 – 1998 – WMI pays Hundreds of Millions of Dollars in Fines and Penalties for Illegal Practices across the Nation 1995 1998 – WMI Admitted to Misstated Earnings of $3.5 Billion Pretax, 1998 – USA Waste, 1/3 the Size of Dating Back to 1992 WMI, Merged and Took Control of the companies 2000 Historical Timeline of Waste Management, Inc. 2005 May 4, 2006 Section 2.0 – Background Information Page 12 of 163
  13. 13. Section 3.0 – External Analysis Page 13 of 163 3.0 External Analysis The external analysis is critical for a firm to understand to be able to realize the opportunities and threats that exist in the industry they are competing in to help achieve a strategic competitiveness. The external analysis consists of a general environmental analysis, industry analysis, five forces analysis, industry competitor’s analysis, and the key success factors for the industry. 3.1. General Environmental Analysis In order for a firm to effectively compete in an industry, an analysis of its specific industry must be undertaken. This is done to provide the firm with a description of the elements in society that directly effect the industry and the direction managers must take to implement appropriate strategies to survive. This study is commonly referred to as the general environmental analysis. It primarily consists of six primary factors, which are political/legal, economic, socio-cultural, demographic, technological, and global. These six sections describe the external environmental factors a firm must understand to effectively compete in a specific market. 3.1.1. Political/Legal Factors The politics of many countries have a direct effect on the operations at a waste disposal company. Since this industry disposes of waste that ranges from curbside consumer waste to industrial toxic waste, any new laws and regulations that concern the industry can have a drastic economic impact on the company’s bottom line. The US Government has instituted many laws and regulations that directly affect this industry. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  14. 14. Section 3.0 – External Analysis Page 14 of 163 There are many environmental, public and occupational health and safety-related statutes that affect the waste disposal industry in the United States. The one act that changed the industry to the form it exists in today was the Solid Waste Disposal Act, as amended, including the Resource Conservation and Recovery Act of 1976. Many companies changed drastically to adhere to these new regulations. When handling the disposal and release of hazardous waste, this is regulated under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. The Federal Water Pollution Control Act of 1972 (The “Clean Water Act”), as amended controls the release of pollutants into streams, rivers, groundwater, or other surface waters. This has the greatest effect on the development and maintenance of landfills. The industry is also regulated by the amount of pollutants that are released into the environment by the Clean Air Act of 1970, as amended. Since waste management is a very physical operation for many of its employees, their safety and well being are monitored by the Occupational Safety and Health Act of 1970, as amended. This is very important to keep the workers safe and functioning on the job. There are also many specific state and local regulations that are relevant to waste disposal that effect the industry (Waste Management, 2005). These can have as great of effect on the industry as the national standards currently do. In Texas, regulations are already being enforced which relate to the locations of landfills around the state. The new regulations would require wider buffers between dumps and communities, more stringent runoff controls, and the installation of modern liners before garbage can be piled on top of older dumps (Cappiello, 2006). This is a Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  15. 15. Section 3.0 – External Analysis Page 15 of 163 growing trend across the country as more stringent environmental regulations are passed and implemented in the industry. The push for more recycling efforts is also on the rise. This is primarily due to the lack of land for disposal sites and the lack of cooperation by states to handle hazardous wastes. The following, Figure 3.1-1, shows the number of landfills in the US has been decreasing rapidly from 1988 to 2002. This is even more alarming due to the average life expectancy of a landfill only being 26 years. Figure 3.1-1: Number of Landfills in the United States by Year (Source: EPA – Municipal Solid Waste Generation, Recycling and Disposal in the United States, Facts and Figures for 2003) Corporations need to step up and take a leadership role in the disposal of all substances and possibly gain government support for the effort. If this is not done, there could be an increase in illegal dumping around the nation that would have far greater consequences than disposing of these substances properly. In conclusion, the political/legal factors that affect the waste disposal industry are a considerable threat Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  16. 16. Section 3.0 – External Analysis Page 16 of 163 that must be understood and monitored. It is one of the more important factors that affect the industry. 3.1.2. Economic Factors The economy of the US is moving along at a relatively strong pace and is recovering from the recession that began around 2001, primarily due to the dot.com bust in the market and the events of 9/11/01. This has been a slow and tedious recovery. The housing market has been a strong factor in bringing the economy around. The prime lending rate fell for many years, but has now been on a steady increase to help slow and control the rate of inflation. This has been somewhat misleading since inflation has been relatively controlled for the past few years. Figure 3.1-2 shows the prime lending rate as it has fluctuated over the last 50 years. It is remaining relatively low with respect to the past where it had risen to a high of over 21 percent. This is a good measure on how the economy is doing and the amount of money consumers are willing to spend. It also has an effect on larger companies when they borrow for capital projects. If the rate is too high, many companies postpone projects to a later date and growth begins to slow. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  17. 17. Section 3.0 – External Analysis Page 17 of 163 Prime Lending Rate From 1955-2006 25 20 Prime Lending Rate Value 15 10 5 0 /2 19 9 /1 19 1 8/ 7/1 95 /2 /19 0 1/ 8/ 1 72 1/ 5/ 1 74 9/ 7/ 1 80 8/ 9/1 82 7/ 6/ 1 84 /1 /20 9 /2 4 11 2/1 68 7/ 7/1 71 4 /1 3 /1 /19 4 3/ 3/1 74 8/ / 1 5 9/ 2/ 1 76 7/ / 1 7 11 7/ 1 78 3/ 9/ 1 79 6/ / 1 9 10 3/ 1 80 /1 19 0 3/ 6/1 80 2/ 6/ 1 81 1 1 /1 2 5/ /19 6 2 /1 8 1/ 0/2 01 6 12 25/ 95 11 /1/ 99 12 /8 97 11 22 99 31 00 29 97 11/25 97 12 97 15 97 19 97 12 /1/ 98 11 17/ 98 10/22 98 14 98 1 8 00 1 9 2 9 2 9 /2 9 2 9 2 9 2 9 / 9 1 9 1 9 9/ /1/1 9 Date Figure 3.1-2: Prime Lending Rate During 1955-2006 (Source: www.beginnersinvest.about.com – Bank Prime Loan Rate Changes – Historical Dates of Changes and Rates) The Gross Domestic Product (GDP) has also been relatively stable for the last few years. It has maintained a steady rate of growth between two to four percent each quarter for the last couple of years. This shows the output of goods and services has remained steady, with only the US Government spending slowing it down. Figure 3.1-3 illustrates the growth of the GDP of the United States for the past four years. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  18. 18. Section 3.0 – External Analysis Page 18 of 163 Figure 3.1-3: US Gross Domestic Product Percent Growth From 2002-2005 (Source: US Department of Commerce, Bureau of Economic Analysis) The economics for recycling programs is astounding. There are currently more than 56,000 recycling and reuse establishments in the US today. These centers employ approximately 1.1 million people to run the day to day activities that take place. The annual payroll for these employees is around $37 billion, with a gross of $236 billion when it comes to annual revenues. This shows that the number of workers employed in the recycling industry rivals the amount that are currently employed in the automobile and truck manufacturing industry. It is also larger than the waste management and disposal industries. The wages for the industry are actually higher than the national average of all industries (EPA, 2006) Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  19. 19. Section 3.0 – External Analysis Page 19 of 163 The demand curve has also been fluctuating for the past years. This is primarily due to the increase in population of the country, the amount of regulation that is being imposed on the industry, the changes in customer’s views on waste disposal, and that the US society leads the industrial world in waste generation. It is estimated that the average US citizen creates around 4.5 pounds of waste per day. This is closely followed by Canada at 3.75 pounds per day (EPA, 2006). This causes a lot of demand to be placed on the waste disposal companies to safely dispose of the waste being generated every day. The higher the amount of waste being generated each day becomes, the more costly it will be to remove it. This shows that the demand curve will most likely shift to the right to keep up with this trend. The increased demand for oil in the world is becoming a supply issue. This is driving the price of oil to all time highs, which in turn does the same for a gallon of gasoline. Gasoline prices are continuing to increase and are currently at prices that have not been seen in the past. Since most waste companies spend a great deal on transportation costs to move the waste from homes or businesses to landfills, this represents a dramatic increase in the costs to conduct business. Currently, gasoline and diesel prices are above $2.50 a gallon and show no signs of decreasing in the immediate future. Until the World’s hunger for oil is stabilized and major oil producing countries are brought under control, this will continue to be a significant burden on the profits of waste disposal companies. This is the key element in the economic factors that affect the industry. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  20. 20. Section 3.0 – External Analysis Page 20 of 163 3.1.3. Sociocultural Factors The view of the consumer with respect to waste disposal is a major factor in the survival of a company in this industry. The attitudes and values of the consumer can affect all other factors in the general environment. The views of the consumer towards industrial institutions and the environment are elements in the change and reform that occur in the government. Since the waste industry is a predominant figure in the United States, it has been a target for environmental groups and government regulations for many years. This will only increase as prices for waste disposal increase and the countries population continues to rise. The increase in environmental activism is a force that needs to be considered. Anything the waste industry attempts to create and implement needs to be viewed by the public as morally and ethically proper and follows the beliefs of the consumer. Otherwise, it will be rejected by a majority of the population and government regulations might even stop the program entirely. The US is becoming more of a recycling nation, but many individuals will only change if they are forced to do so. This is primarily where recycling fails in some communities. If it costs the consumer no additional funding, time, or effort to just throw everything away, they believe there is no reason to change. There are some programs that offer incentives for individuals and corporations who do recycle on a daily basis. This includes lower costs for programs that charge consumers for the weight or the amount of trash they dispose of. These are considered ‘Pay As You Throw’, or PAYT programs (EPA Website, 2006). There are also huge tax incentives for companies that are considered ‘green’ operators and recycle on a large scale. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  21. 21. Section 3.0 – External Analysis Page 21 of 163 A new environmental push is for what is called “Zero Waste America.” Zero Waste is defined as “recycling of all materials back into nature or the marketplace in a manner that protects human health and the environment” (Zero Waste America, 2006). This is a noble cause, but is somewhat unrealistic at this time. There is too much waste being created and a lack of concern by consumers and industries, along with deficient governmental support, to make the change. It is going to be a push by waste disposal companies to spearhead this effort if there is any chance of it succeeding in the future. Sadly, most individuals will not change their habits until they are forced to do so. The sociocultural factor shows the need for an increase in the recycling programs across the national and the need for increased participation by residential and commercial customers. 3.1.4. Demographic Factors The primary purpose for a waste disposal company is to service its customers, mainly residential consumers, but also includes commercial and industrial customers. This makes it important for the company to understand the demographics of many areas in order to determine how to effectively service these areas. The firm also needs to know the commercial aspects of an area since this is also a section that many companies service. Population is a very important factor in determining where a waste disposal company should operate. The key is the more people in an area, the greater amount of waste they will produce. The population of different regions of the country is monitored to help determine which areas would be profitable to expand into. Currently, the population of the US is over 295 million people. This is crucial since individual Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  22. 22. Section 3.0 – External Analysis Page 22 of 163 consumer trash collection is a major portion of the business of a waste disposal company. The United States is known for its acquisition of many material goods. It is also known as a society that throws damaged or broken items away and buys new ones, since this is usually drastically cheaper than trying to repair the items. This causes a large deal of waste to be created and the need to dispose of it. The population is expected to grow at a rapid pace. The country is forecasted to gain almost 100 million people by the year 2050 for a grand total of 394 million individuals. The World is also expected to increase in population from its current value of around 6.5 billion people to more than 9 billion in the year 2050 (United Nations Population Division, 2004). This illustrates the fact that there will be a dramatically increased need for waste disposal companies around the world. The following, Table 3.1-1 illustrates the increase in the worldwide population between the years of 2005 and 2050, in five year increments. Year Population 2005 6,464,750,000 2010 6,842,923,000 2015 7,219,431,000 2020 7,577,889,000 2025 7,905,239,000 2030 8,199,104,000 2035 8,462,265,000 2040 8,701,319,000 2045 8,907,417,000 2050 9,075,903,000 Table 3.1-1: Worldwide Population Figures Estimated for the Years Between 2005 to 2050 in Five Year Increments (Source: US Census Bureau, 2006) Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  23. 23. Section 3.0 – External Analysis Page 23 of 163 With the aging of the baby boomers and their increased need of medical care, this will cause a substantial increase in the amount of medical waste that is created. This is currently being handled by only a handful of firms and will need to be expanded in the near future. It is estimated that there are 78.2 million baby boomers living in the country as of 2005 (US Census Bureau, 2006). This is also the fastest growing segment of the population around the World and is projected to increase through 2025. This is shown below in the following two Figures, 3.1-4 and 3.1-5. Figure 3.1-4: Change in the Elderly Population and Total Population by Region: 2002-2025 (Source: US Census Bureau, International Programs Center, Global Population Composition 2002) Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  24. 24. Section 3.0 – External Analysis Page 24 of 163 Figure 3.1-5: Elderly Population (Ages 65+) as a Percent of the Total Population by Country: 2025 (Source: US Census Bureau, International Programs Center, Global Population Composition 2002) The elderly is a section of the population that could contribute a substantial amount of waste in society. This is not only medical waste, but personal possessions as well. As they begin passing away, something will have to be done with their personal possessions. Many things may go to family members, but a lot will probably be thrown out. This includes some of their homes that may be relatively old in age and would be better torn down than renovated. This could be a rather large problem to deal with. Today, there are more people living in areas that are prone to natural disasters. There is also an increasing problem that is unfolding in the US, which is the dilapidation of the cities and structures around the country. This could create a large amount of construction debris, demolition debris, and debris from structures destroyed by storms and other environmental catastrophes. This will either need to be recycled, or a large Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  25. 25. Section 3.0 – External Analysis Page 25 of 163 amount of landfill space could be used. These phenomenons are steadily increasing around the world, which will force the industry to follow the correct path. Due to the changes in demographics that are expected to take place in the near future, there will be a large increase in the amount of waste generated and the capacity of landfills will continue to diminish at an alarming rate. 3.1.5. Technological Factors With the amount of regulations and environmental laws that exists and are being created on a daily basis, new methods of waste disposal is in drastic demand. No longer is it as simple as digging a hole, burying the waste, and then forgetting about it. With the decrease in disposal locations and the increase in waste production, this is becoming an alarming problem in today’s society. There are many methods in use today to combat this growing issue. The creation and maintaining of landfills is a daunting task due to today’s regulations and laws that govern them. It is becoming increasingly difficult to gain permits to create landfills across the country. Companies in waste disposal must create new methods of removing and disposing of waste products. Many have created clean incinerators that burn the trash for power. Generators are powered by the burning trash to create electricity. The smokestacks are filters that remove a large portion of the pollutants before they reach the atmosphere. Figures 3.1-6 and Table 3.1-2 show the percentages of materials that are used in combustion for the generation of electricity and show the overall amount of trash that is recovered on a yearly basis. The amount of trash is then divided into the methods that are used to dispose of it. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  26. 26. Section 3.0 – External Analysis Page 26 of 163 Figure 3.1-6: Management of Municipal Solid Waste in the United States - 2003 (Source: EPA – Municipal Solid Waste Generation, Recycling and Disposal in the United States, Facts and Figures for 2003) Table 3.1-2: Generation, Materials Recovery, Combustion, and Discards of Municipal Solid Waste, 1960-2003 (Source: EPA – Municipal Solid Waste Generation, Recycling and Disposal in the United States, Facts and Figures for 2003) Even the landfills are contributing to the creation of energy from trash. The gases that are omitted from the decaying solid waste is captured and stored in tanks for power generation. There are generating plants near landfills that create enough power to provide electricity for small towns and cities. This has become a cheap and Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  27. 27. Section 3.0 – External Analysis Page 27 of 163 economical way to produce small scales of electricity and conserve the fossil fuels that are currently being used. Due to the number of landfills decreasing at an alarming rate, this generation may not be able to spread to large areas of the country. The most common and well known technology for decreasing the amount of waste placed into landfills will be recycling. This is becoming a very profitable industry due to the increased support that is being provided by the government and the consumer. With the price of raw materials continually increasing, it is now becoming even more cost effective for companies to use recycled materials than it is to bring in and process raw materials. Waste disposal companies are also seeing the benefits. The companies that recycle enjoy an increase in public perception and less regulation and protests from governments and environmental groups. Everyday, many more products are able to be recycled due to technological advances in the industry. The ultimate goal is to become a waste free society and cease the wasteful practices of just throwing everything away and forgetting about it. With the rise in oil prices, this is directly affecting the everyday operations of a waste disposal company. The biggest cost of the companies competing in this industry is the fueling costs associated with the massive fleet of trucks needed to transport the waste to disposal sites. This is an issue that urgently needs to be addressed. Companies are updating their truck fleets to run on the more clean burning natural gas than on diesel fuel. The trucks are also being equipped with a more advanced mechanical system to help in the disposal of the waste. This consists of arms and hooks that grasp on to the waste can, lifts it up, and dumps it in the back of the truck. This helps slow down and eliminate the loss of time and productivity when an employee Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  28. 28. Section 3.0 – External Analysis Page 28 of 163 claims disability pay by decreasing the amount of manual labor the employees must conduct. Increased technological advances will improve the handling of waste and increase the life expectancy of landfills. This new technology will also increase the fuel efficiency of its transportation fleets. The recycling efforts by consumers will be increased due to advances in the handling and processing of these materials. 3.1.6. Global Factors The global segment is one of constant change due to government actions and events that are occurring on a daily basis. Solid waste disposal is an issue for every individual around the world, no matter what country they live in. It is an established industry in many of the industrialized nations around the world. This is due to its existence dating back over 100 years. This makes it very difficult for firms to break into these markets and become a successful competitor. There will always be a demand for this industry for the foreseeable future, but many changes are being initiated on a daily basis. These changes are primarily due to the governments of the world imposing stricter laws and regulations that are created to regulate the waste disposal industry. There are also many countries around the world that are developing a rapid pace, sometimes outdistancing the governments trying to serve them. This factor is beyond the scope of this analysis, since the primary areas of concern are the United States and Canada. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  29. 29. Section 3.0 – External Analysis Page 29 of 163 3.1.7. Summary of the General Environmental Analysis The general environment is a force that must be strongly considered for waste disposal companies to survive in their industry. The biggest force that weighs heavily on the industry is rising fuel costs and government regulations and that can change the industry in a short period of time. There are many opportunities to be found in this industry and they mostly outweigh the threats. Economically and technologically, the biggest impact will be fuel costs. The price of oil will no longer be at the low levels most of us enjoyed. The demand has become too great to make this happen. This will continue to be a large portion of waste disposal companies costs, unless they take advantage of new types of fuel that are coming available. This will ultimately show the leader in the industry with respect to driving down costs and increasing revenue. The political/legal has a strong affect on the industry. As pollution increases and there is a larger consumer push for reform, the political powers will ultimately shape the industry. The only way this will not happen is if the companies participating in this industry make changes before they are forced to. This could place them ahead of the competitors when the changes are forced to occur. The sociocultural segment will also play a role in this, primarily due to the voice of the consumer and the citizenry. The only time political forces implement new laws is when the public demands a change. People are still a powerful force in all democracies. The global and demographic segments round out the rest of the environmental analysis. With the rise of the world population and the attitudes towards waste, waste disposal will continue to become a gigantic force to contend with. This not only relates Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  30. 30. Section 3.0 – External Analysis Page 30 of 163 to solid wastes, but also to medical, toxic and chemical wastes, which will all continue to grow as the population grows. The medical waste is going to increase due to the growing number of baby boomers in the US and elderly around the world. It appears that waste disposal will continue to be a problem for many years to come. 3.1.8. Driving Forces for the Future There exist primary driving forces for the industry and waste disposal companies in order for them to be successful in the future. These forces are outside of the firm and can change the strategy of the industry and organizations over time. Managers must be aware of these driving forces that shape the industry in the future, or they will not be prepared when the actual changes begin to take place. With the increased demand in waste disposal and recycling services, the major driving force that will affect the industry is the rising fuel costs for the transportation fleets. Since most waste disposal services are considered transportation companies, one of their largest expenses is fuel for the vehicles in their fleet. This can spawn a decrease in overall revenue, an increase in operating costs, and increases in billing prices to the residential and commercial customers. This is primarily being driven by the extremely high oil price that exists in today’s market. A second driving force that exists deals with the way wastes are currently being handled. With the increase in stringent environmental regulations, the reduction in the number of existing landfills, and the decrease in the permits for new landfill locations, the industry is being forced to change to more environmentally friendly methods for the management of waste. This is increasing the drive for increased recycling efforts across the nation and new efforts to reduce the amount of waste being generated. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  31. 31. Section 3.0 – External Analysis Page 31 of 163 These driving forces encompass all of the general environmental factors that were previously discussed. It is very important that these forces are taken seriously by all companies in the industry if they wish to be profitable and continue to grow in the future. 3.2. Industry Analysis For the waste disposal industry a through understanding of the industry environment as a part of the external influences serves as an important step towards proper strategy formulation. Generally, the industry environment has a more direct impact upon an organization than the external environment as a result of the nature of competition. Competition within an industry among a group of companies leads to competitive actions and competitive responses that affect the strategic position of a particular organization and the profit potential for the industry as a whole (Hitt, Ireland, & Hoskisson, 2005). This is no different for waste disposal companies competing within the environmental services industry. 3.2.1. Industry Description We live in a society where almost anything produce is viewed as disposable by the consumer and industries. The collection and disposal of this waste is becoming a monumental problem, mainly due to the extreme amount of waste that is produced around the world. It has been estimated by the EPA that each man, woman and child in the United States generates around 4.4 pounds of solid waste every day. This relates to hundreds of millions of tons of trash produced every year, just in the United States. The waste management industry primarily disposes of two types of waste: municipal Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  32. 32. Section 3.0 – External Analysis Page 32 of 163 solid waste and hazardous waste. The biggest sector deals with the disposal of solid waste. The main categories of municipal solid waste include household, commercial, business, institutional, special waste, construction debris, demolition debris, regulated medical waste, yard waste, sludge, and scrap tires. Hazardous waste is toxic chemicals that burns readily, are corrosive, or are explosive. The most common industries that generate this type of waste consist of exterminators, hospitals, auto repair shops, petroleum refiners, and chemical manufacturers, to name a few. The waste disposal industry is formally categorized according to the SIC code as 4956 - Refuse Systems and from the NAICS code as 56211 – Solid Waste Collection. A critical driver or key success factor that characterizes the industry resides from an organization obtaining economies of density as a result of the heavy laden fixed asset infrastructure required to operate. The following description highlights the overall processes surrounding the management of municipal solid waste (MSW). Refuse system/solid waste collection The process for MSW management is accurately described as a reverse-flow channel since materials are moving in a backward motion (Kotler, 2003). Commercial motor vehicles are dispatched for the collection of solid waste. The collection commercial motor vehicle trucks either proceed directly to landfills for disposal or are directed to a transfer station. Landfills for MSW are not the only option for managing refuse. The use of recycling and incineration help to offset landfills as the only means for handling MSW. This slows down the velocity of MSW ending up in landfills thereby extending the active life of the disposal sites. Additionally, waste-to-energy (WTE) programs in the industry provide meaningful usage of MSW. Such programs include Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  33. 33. Section 3.0 – External Analysis Page 33 of 163 the use of gases emitted from landfills as an energy source. Also MSW is processed by WTE plants for the use of energy. 3.2.2. Industry Operations Major operations are waste collection, disposal, transfer, and recycling. Waste collection accounts for about 55 percent of industry revenue, disposal in landfills is 20 percent, and recycling for 15 percent. The refuse volume breakdown is 55 percent in landfills, 30 percent recycled, and 15 percent combusted (Thompson Gale, 2006). Small companies usually operate in only one of these segments. Larger companies often have vertically integrated operations that include all of these components. Collection Collection consists of large fleets of trucks and way stations that collect and consolidate the refuse for disposal in the landfills. The collection trucks are specialized vehicles designed to pickup refuse and compact the waste. There are four basic models of garbage truck. Front loaders generally service commercial and industrial sites. They have large prongs on the front which are carefully aligned with arms on the dumpster. The dumpster is then lifted over the truck, until it is upside-down and the trash will then fall out into the receptacle. Rear loaders commonly service residential areas. They have an opening at the rear that a trash collector can throw garbage bags or empty the contents of trash cans into the truck without the operator having to lift the waste by hand. The rear loader is usually equipped with some type of compactor that will compress the garbage, and move it towards the front of the vehicle. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  34. 34. Section 3.0 – External Analysis Page 34 of 163 Side loaders are versions of either front or rear loaders that lift small trash containers or have openings on either side to deposit trash. Some side loaders are equipped with a mechanical remote-control arm that grasps a trash container such as a wheeled bin and empties it into the truck in the same manner as front loaders. Pneumatic collection is a truck as a 24 ton vacuum cleaner. On the top it has a crane with a tube and a mouthpiece that fits in a hole, usually hidden under a plate under the sidewalk. From here it will suck up garbage from an underground installation. The system usually allows the driver to "pick up" the garbage, even if the access is blocked by cars, snow or other barriers. There are also larger trucks that carry trash over long distances which are usually modified dump trucks. Garbage trucks empty their trash in landfills. Most rear loaders lift the rear section so that the garbage will spill out. Front loaders more commonly have a moving wall that pushes the garbage out. Some larger landfills will have large contraptions that tip the entire truck, thus allowing the trucks to not have to carry their own method of emptying the garbage. Landfills A landfill consists of operations, leachate management, water quality sampling, and quarterly monitoring reports. Operations planning for solid waste landfills including site life estimates fill sequencing, winterization plans, scheduling of new cell design and construction. This is after landfill design has been completed and geo-technical/ slope stability analyses performed. Leachate management is the evaluation, design, and construction of leachate re- circulation systems to enhance degradation of wastes. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  35. 35. Section 3.0 – External Analysis Page 35 of 163 Water Quality Sampling is the collection and analysis of groundwater samples at solid waste landfills. Quarterly Monitoring Reports are preparation of quarterly groundwater monitoring reports for solid waste landfills including statistical evaluation of data. Landfill permits (preliminary and final closure plans), environmental impact analyses (CEQA), storm water management (NPDES), air quality permits, and construction/operation permits has to be approved by local governments along with adhering to federal government guidelines. Recovered landfill gas can be converted into energy. This is in the form of electricity, steam, heat, and vehicle fuel to reduce America’s dependence on petroleum products. The continuing development and management of landfills will grow in to the next century. Transfer Waste is deposited at transfer locations from smaller collection trucks and loaded onto large transports. The large transports move the refuse to the landfills. This is a means of optimizing the process of moving refuse to the final destination, the landfills. This also increases the efficiencies in operations. Recycling Recycling is more firmly entrenched than ever. Recycling and composting activities prevented about 64 million tons of material from ending up in landfills and incinerators. Today, this country recycles 28 percent of its waste, a rate that has almost doubled during the past 15 years. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  36. 36. Section 3.0 – External Analysis Page 36 of 163 While recycling has grown in general, recycling of specific materials has grown even more drastically: 42 percent of all paper, 40 percent of all plastic soft drink bottles, 55 percent of all aluminum beer and soft drink cans, 57 percent of all steel packaging, and 52 percent of all major appliances are now recycled. Twenty years ago, only one curbside recycling program existed in the United States, which collected several materials at the curb. In 2001 there are 9,000 curbside programs and 12,000 recyclable drop-off centers across the nation. This includes 480 materials recovery facilities that have been established to process the collected materials. The recycling program in New York City is collecting paper at the curbside. This is because it is clearly cost-effective. After getting better prices from the commodity markets, the city reintroduced multi-material curbside recycling. Last February when New York City's Independent Budget Office noted that the increase in the cost of waste disposal, coupled with higher recycling levels, could make recycling into “the cheaper alternative, creating a strong incentive to promote recycling as a way to hold down the total cost of waste management.” Recycling is paying with the increase costs of aluminum, paper, plastic, and glass. 3.2.3. Industry Life Cycle In the U. S. the solid waste industry generated more than $43 billion in revenue in 1999. In total, the U.S. solid waste industry managed approximately 545 million tons of waste in 1999. The breakdown is, (about 374 million tons, or 68 percent) was land filled, 31 million tons, (5 percent) was incinerated and 140 million tons, (27 percent) and was recycled. This increased 28% over the last 10years. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  37. 37. Section 3.0 – External Analysis Page 37 of 163 The life cycle of the Waste Industry is exponential in growth. There seems no end to the refuse that consumers and industry want removed. The market looks excellent for years to come because there is no incentive to decrease the refuse. This is illustrated below in Table 3.2-1. Business Sector Revenues Employees Facilities Equipment Tons (billion) Owned Owned Managed (millions) Publicly Traded $20.6 119,500 1,840 66,100 218,700 Companies Privately Held $12.4 151,700 6,430 101,400 158,200 Companies Public Sector $10.3 96,600 7,470 38,800 167,800 Total $43.3 367,800 15,740 206,300 544,700 Table 3.2-1: United States Solid Waste Industry Summary (Source: National Solid Waste Management Association, 2001) 3.2.4. Industry Dominant Economic Features The revenues solid waste industry generated is estimated to be $43 billion. Approximately 76 percent of this amount was generated by the private sector. The relative size of the industry directly accounted for roughly one-half of one percent of the nation's gross domestic product (GDP). The industry's industrial output and employment were larger than the individual economics of several such states as North Dakota, Vermont, and Wyoming. The economic impact of the industry contributed over $96 billion, 948,000 jobs, and just over one percent of U.S. GDP to the nation's economy. This included all direct, indirect and induced effects resulting from solid waste industry activities. For every dollar of revenue generated by the industry, a total of $1.23 in additional revenue was generated in the economy through the multiplier effect. The solid waste industry Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  38. 38. Section 3.0 – External Analysis Page 38 of 163 employed approximately 367,800 people. Total industry compensation, including benefits, was estimated at $10 billion. Based on these figures, employees in the solid waste industry were paid an average of $27,200 per year, including benefits. Similarly, for every job in the solid waste industry, the multiplier effect created an additional 1.58 jobs outside the industry. 3.2.5. Market Size Research on the United States waste industry is valued at $ 44 billion in 2004 according to the research firm of Chartwell Information. The break down is as follows: collection services are 58% ($25.5 billion), disposal services generated 30% ($13.5 billion) and processing accounted for 12% ($5.3 billion). The National Solid waste Association estimates that there are 15,500 organizations solely in the business of hauling waste. There are 11,500 firms owned approximately 15,700 facilities that disposed of, recycled, incinerated or processed solid waste. The majority of these operations were very small. The nation’s top three firms are Waste Management, Allied waste Industries, and Republic Services. The top three companies combined for a total of 20 billion in revenues and representatives nearly 50% of the waste disposal market. 3.2.6. Market Growth Rate The market growth for solid waste in the United States is 4.30% per year for the years 2003 and 2004. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  39. 39. Section 3.0 – External Analysis Page 39 of 163 YEAR $ Billion % Growth 2001 38 4.00 2002 40 4.2 2003 42 4.3 2004 44 4.3 Table 3.2-2: United States Solid Waste Industry Growth Rate (Source: Valuline, 2006) 3.2.7. Industry Trends The current trends in the market place are being dominated by the federal government. The solid waste landfills dominant disposal position has created two policies. The first one is encouraging bioreactor technology research. The second one is rewarding owners who develop landfill gas-to-energy and waste-to-energy projects with tax credits. The resulting bioreactors could eventually help 80% of today's landfills use their airspace more wisely. The tax credits should be able to boost renewable energy project development. Legislation is moving the processing and recycling sector of the industry also. Communities that have been recycling for some time are finding it difficult to raise their diversion rates. Many are imposing disposal bans on specific types of waste to be recycled, such as e-waste. Overall garbage collection is becoming more difficult, not easier. Cost increases in fuel, tires, and trucks and insurance are forcing haulers to be more efficient. Haulers also are facing employee pressures. Metro area workers such as those in Atlanta and Los Angeles have discussed forming unions. New federal rules regarding training requirements, seat belts and idling limits are adding to the costs. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  40. 40. Section 3.0 – External Analysis Page 40 of 163 3.3. Five Forces Analysis In order to better understand the environment in which waste disposal companies operate, an analysis will be conducted using Michael Porter’s Five Forces Model (Hitt, Duane, & Hoskisson, 2005). These factors are important, as they affect the company’s ability to serve its customers and make a profit. A change to any of these forces should cause the company to re-evaluate the marketplace. The five factors, shown in Figure 3.3-1, consist of threat of entry, power of buyers, power of suppliers, threat of substitutes, and competitive rivalry. Figure 3.3-1: Porter’s Five Forces Model (Source: EPA http://www.themanager.org/Models/p5f.htm ) Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  41. 41. Section 3.0 – External Analysis Page 41 of 163 3.3.1. The Threat of Entry The threat of entry by new competitors in the waste disposal industry is considered to be low. New entrants must overcome regulatory and legislative barriers before they can compete in the waste market. At this time, there is no real threat of new entrants into the market. This is due to two factors. The first is the control of landfills. There are a few large companies in the industry that control the majority stake of all landfills. This creates an almost impermeable barrier for anyone entering the market. Whichever company controls the landfill sites in a geographic market, that firm has an advantage over the entire waste disposal market. It would be a challenge for competitors to obtain a new landfill site because of government regulations and residents in the proposed area. The second factor that slows entry into this market is the fact that many of the larger firms operate under the strategy of acquiring new entrants in the market. This makes it very difficult for smaller entrants in the market to effectively compete and grow within the market. There is always the fear that the smaller firm will be overtaken by one of the larger competitors in the industry. There are also restrictions due to the amount of capital that is required for the smaller firms to participate in mergers and acquisitions, in order to compete with the major firms in the industry. 3.3.2. The Power of Buyers The power of buyers in the waste disposal industry is moderate to low. Consumers in the past have had little bargaining power, but this is beginning to change. Most agreements and contracts are negotiated with state and local government Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  42. 42. Section 3.0 – External Analysis Page 42 of 163 agencies. Many communities are allowing consumers to choose their own waste collection service and the cities are instituting a ‘hands off’ approach to their operations. This is creating an affordable and formidable substitute to removal of waste. Consumers no longer have to abide with the contract that is accepted by the city government and are able to make their own choices. High switching costs can lead to low buyer power. This is primarily seen when a city government is running the program. If a government entity wants to switch refuse companies, the length of time involved is sometimes two to five years before a new bid is released. It would cost the government a considerable amount of time and money in the effort to switch refuse collection companies. 3.3.3. The Power of Suppliers In evaluating the power of suppliers, it was found to be low to moderate. Suppliers in the value chain are relatively few, but important. The larger waste disposal companies own their own not-for-hire fleet of trucks in the United States; therefore, the truck suppliers, as well as fuel providers, can significantly impact the profits of the industry. The supply of waste disposal vehicles is in somewhat of an abundance due to the amount of companies entering the supply chain to offer customized trucks for specific firms in the industry. The waste disposal companies possess a certain degree of bargaining power over suppliers of these vehicles due to large volume of the purchases that waste disposal companies make every year. While the supply of transportation is accessible, the availability of land for landfills is not. It has been more and more difficult, due to government regulations and consumer opposition in the process of obtaining land for additional landfills. It is even Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  43. 43. Section 3.0 – External Analysis Page 43 of 163 more difficult to obtain land in a favorable location in order to minimize the costs of transportation. 3.3.4. The Threat of Substitutes The treat of substitutes in the waste disposal industry is considerably low. Trash is not something often thought about, until it is not picked up. What other disposal options do consumers have? While recycling has become more popular, according to David Steiner’s interview with the History Channel (April 23, 2006), recycling is not as profitable as disposal. With the strict environmental regulations, customers have few options for trash removal and disposal. Environmentalist may eventually have an impact and recycling may become more profitable, but at the current time, trash disposal options are very limited. 3.3.5. Competitive Rivalry The waste disposal market is one that is very high when it comes to competitive rivalry. The companies in this industry compete in a highly competitive market. These firms face intense competition from governmental, quasi-governmental and private sources in all aspects of its operations. In North America, the industry consists of large national companies and small regional and local companies. There are also government entities that operate in the industry in small counties and municipalities. Counties and municipalities have advantages financially since tax revenues are accessible to their operations, including tax-exempt financing. In the past, larger firms in the industry have aggressively sought to purchase local and regional competitors in order to reduce the competition. These major corporations have an advantage since they own most of the Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  44. 44. Section 3.0 – External Analysis Page 44 of 163 landfills in the country and control a majority of the market. The main competition arises when competitors bid lower for a community waste disposal contracts. The larger companies risk losing a share of that market when this occurs. Much of the competition is based strictly on price, because other than customer service, there is a low level of product differentiation in the services delivered. 3.4. Industry Competitive Analysis The waste disposal business is a mature business characterized by a relatively stable customer base. Competition is driven by local economic and demographic factors as well as fluctuations in capacity utilization, in both the collection and landfill business. Customer service satisfaction levels industry-wide are very high since the collection customer has a very low tolerance for poor service. The following will provide a summary of the major competitors in the industry and how their strategic moves affect Waste Management, Inc. and the rest of the industry. 3.4.1. Industry Competitors Waste Management, Inc. is the industry leader. The reason that it is number one is because of the large amounts of resources it controls. Waste Management owns roughly 290 landfills, 138 material recovery facilities, 85 beneficial-use landfill gas projects, and 17 waste-to-energy plants. This is a considerable amount of resources when compared with the other competitors in the industry. While the industry has a vast amount of competitors, including national, regional and governmental agencies, the main comparison will focus on Allied Waste Industries, Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  45. 45. Section 3.0 – External Analysis Page 45 of 163 Inc and Republic Services, Inc., who are currently the number two and number three competitors in the industry. Allied Waste Industries, Inc. Allied Waste Industries, Inc. (AW) is number two in the industry in terms of revenue dollars and employees. The publicly traded company provides collection, transfer, recycling, and disposal services. Allied Waste operates 169 landfills, 166 transfer stations, and 57 recycling facilities. The company provides disposal services for approximately 10 million residential, commercial, and industrial customers. It operates in 122 major markets in 37 states and Puerto Rico. The company is vertically integrated in the pickup of refuse and delivery to landfill sites. Allied Waste considers the waste collection and disposal business to be a local business. Therefore, the operations’ characteristics and opportunities differ in each of its markets. By combining local operating management with standards for best practices, Allied strives to standardize the common practices across the company. This is done while maintaining the day-to-day operating decisions at the local level, which is closest to the customer. The company implements this philosophy by organizing the operations into a corporate, region and district infrastructure. Allied’s management believes this model allows them to maximize the growth and development opportunities in each of its markets. This contributes to its ability to operate the business efficiently, while maintaining effective controls and standards over its operations and administrative matters, including financial reporting (Allied Waste Industries, 2005). Allied has grown from a revenue base of 35 million in 1992 to over 5 billion in 2004. This was due to a number of major acquisitions. The first was Laidlaw, Inc. in Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  46. 46. Section 3.0 – External Analysis Page 46 of 163 1996 and then Browning-Ferris Industries followed in 1999. The firm has continued to acquire smaller companies within the waste industry that provide additional infrastructure, such as landfills and transfer stations. This also includes companies that currently deliver refuse into its existing collection stations. Table 3.4-1 shows some of the primary financial ratios to provide more insight to the performance, size, and efficiency of the firm. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  47. 47. Section 3.0 – External Analysis Page 47 of 163 Profitability Profit Margin 3.55% Operating Margin 15.73% Management Effectiveness Return on Assets 4.16% Return on Equity 6.41% Income Statement Revenue 5.73B Revenue Per Share 17.54 Gross Profit 1.99B Balance Sheet Total Cash 56.10M Total Cash Per Share 0.169 Total Debt 7.09B Total Debt/Equity 2.062 Current Ratio 0.584 Book Value Per Share 7.625 Cash Flow Statement Operating Cash Flow 716.60M Levered Free Cash Flow -193.45M Table 3.4-1: Current Financial Information for Allied Waste Industries, Inc. (Source: Allied Waste Industries, Inc. at Yahoo Finance, 2006) During 2005, Allied’s waste organic revenue growth increased 5.0%, offset by an approximately 1% decrease in recycled commodities revenue. The organic revenue growth was driven by increases in average price per unit of approximately 2.2%, including fuel recovery fees, and volume increases of approximately 2.8%. Operating income for fiscal 2005 increased by $29.1 million over the fiscal year 2004. Most of the operating costs increased from volume increases and normal inflation. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  48. 48. Section 3.0 – External Analysis Page 48 of 163 Republic Services, Inc. Republic Services, Inc. is the third largest company in the industry. The company owns and operates 92 transfer stations, 59 solid waste landfills, and 32 recycling facilities. There focus strategy is in the high growth markets throughout the Sunbelt. The markets of California, Florida, Georgia, Nevada, North Carolina, South Carolina and Texas are included in the Sunbelt region. It also serves markets in 21 states. The solid waste industry experienced a period of rapid consolidation in the late 1990’s. During that time Republic was able to grow significantly through acquisitions. However, acquisitions in the industry have slowed considerably since late 1999. Despite this, the company believes that the opportunity to grow through acquisitions still exists, albeit at a slower pace than experienced in previous years (Republic Services, 2005). The company has continued to reinvest in its existing fleet of vehicles, equipment, and landfills. This strategy is a “Grass Roots” internal strategy for growth. Its business is built by increasing the customer base and expanding existing landfills. A key component of Republic’s financial strategy, as well as the other competitors in the industry, is the ability to generate free cash flow. Republic believes that free cash flow is a driver of shareholder value and provides useful information regarding the recurring cash provided by its operating activities after expenditures for property and equipment. Free cash flow also demonstrates management’s ability to execute its financial strategy. Consequently, Republic has developed incentive programs and conducts monthly field operating reviews that help focus the entire company on the importance of increasing free cash flow. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts
  49. 49. Section 3.0 – External Analysis Page 49 of 163 If the company is unable to identify opportunities that increase growth, it intends to continue to use the free cash flow to repurchase shares of common stock at prices that provide value to its stockholders. As of December 31, 2005, the company had repurchased a total of 51.5 million shares, or approximately 29% of its common stock outstanding at the commencement of its share repurchase. In January 2006, the board of directors authorized the repurchase of up to an additional $275.0 million of its common stock. Republic believes, as does Waste Management, that its share repurchase program will continue to enhance stockholder value. Table 3.4-2 shows some of primary financial ratios to provide more insight to the performance, size, and efficiency of the firm. Leading Edge Consulting Group May 4, 2006 The Waste Management Experts

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